HOW TO CORRECTLY CALCULATE SUBSCRIPTION REVENUE AND OTHER MONTHLY CHARGES

Calculating revenue streams consisting of monthly or other periodic charges is in theory very straightforward: customers pay a regular fixed fee. However, calculating these charges correctly is a challenge, as projections involve using usage or retention assumptions that are difficult to incorporate correctly.

SUBSCRIPTION FEES

Let’s start from one of the most common revenue types for startups: subscription fees, which is only likely to further expand in the future.

After analysing, sizing the market and projecting customers, you should have the following figures for every month or year of your expansion: number of customers reached, number of new customers and number of active customers. This distinction makes the calculation of subscription fees tricky, as we should use the number of active customers to calculate this revenue stream, meaning after incorporating a retention rate. I tend to calculate the number of active customers for the entire business, using a retention rate that applies to all revenue streams. For this reason it is recommended to keep the retention rate rather high and consider lost customers as those that are unlikely to return, while incorporating the specific retention rate of subscription fees by using each subscription’s duration.

The main figures and assumptions needed to calculate subscription revenue are:

  1. The Portion % of your total active customers that will buy subscriptions.
  2. The type of subscriptions that you plan to offer and their duration as well as how often you charge your customers. If you have discounts for yearly payments, it may be better to set it as a separate subscription type with a different price in your financial plan.
  3. Customers split % with the portion of subscription customers who will buy each type of subscription. For subscription fees, the sum should be 100%: it certainly cannot be less than 100%, but it is also unlikely that a customer would buy multiple subscription fee packages, except in few circumstances.
  4. Unit price of each subscription, monthly or yearly depending on the financial plan setup, as well as any price inflation over the years, or a price jump after the beta phase.
  5. Duration of each subscription, which should be accounted for in the calculations as not all active customers will buy 12 months of subscription. Additionally, some subscription fees are paid monthly and some yearly. There are two ways of doing this: you can set payments directly when they occur buy using more complex formulas in the revenue calculation, or you can set a weighted average monthly subscription fee charge based on the assumptions above, and then calculate an average days of receivables to calculate cash flows correctly. When calculating revenue for accounting purposes, it is usual in most countries to recognise revenue when a subscription is sold, and make cash flow adjustments later to receivables, prepayments and unearned revenue.

Directs costs to subscription revenue is instead quite easy to calculate, typical costs would include:

  • Transaction fees, which would also include payments to any third-party providing the services included in the subscription, as these is usually calculated as a % of the fee
  • Data fees in case of technology-based services, where fees may be calculated as a % of revenue or based on a fixed fee per transaction or data transfer
  • Credit card or payment fees

 

RENT FEES

We include rent fees here as they have similarities to subscription fees, being recurring monthly income streams, but this revenue type has its own set of assumptions. It is worth noting that real estate ventures would usually require a separate real estate specific financial plan, but in cases of mixed business models, when rent fees may represent a minor revenue stream or a larger business, it is worth including it in a simplified manner as a regular revenue stream.

As with subscription fees, here we need the number of active customers to calculate this revenue stream. In cases where there is a sign up fee, which can be included in a separate service-related revenue stream, this would apply to the number of new customers, as is the case with deposits, which would have to be then accounted for as payables in the balance sheet, but not as a revenue stream.

The main differences in terms of financial projections between subscription and rent fees are that we do not use the duration of rent for physical rent spaces in most cases, unless the business model demands it, but instead we include a limit by including the maximum number of units to rent that are available the usual occupancy rate per period.

The main figures and assumptions needed to calculate rent revenue then are:

  1. The Portion % of total active customers that will rent, even though this figure becomes redundant when we use a maximum number of units to rent and an occupancy rate % that is lower than the number of customers selected
  2. The types of monthly rent that you plan to offer for different types of spaces
  3. Customers split % with the portion of rent customers who will buy each type of rent. The sum should be 100%, unless the business model allows the same customer to rent multiple spaces at the same time.
  4. Unit price of each rent type as well as any price inflation over the years

Directs costs to rent revenue include more items. Typical costs would include:

  • Property costs, which depending on the business model would include rent/lease from other third-parties, maintenance fees (but major maintenance may be included in investments instead) and service costs, that in some cases represent a large portion of rent
  • Transaction fees, if they apply
  • Credit card or payment fees

Any property purchase cost would be included in investments.

 

SAFEKEEPING FEES

This is a rare type of revenue stream, but it involves unique types of assumptions that entrepreneurs should have to plan carefully. Safekeeping fees may include charges such as rent of a warehouse which is charged based on quantity stored, or non-physical safekeeping fees such as portfolio fees. Again, it is worth noting that in cases when this represents a major revenue source in a business model, it is worth structuring the entire financial model based on these assumptions and calculate this in much more detail: these assumptions are only sufficient when the safekeeping fees represent a minor revenue stream. Investment funds would have their own unique financial model.

As with subscription fees, here we need the number of active customers to calculate this revenue stream. In cases where there is a sign up fee, which can be included in a separate service-related revenue stream, this would apply to the number of new customers.

The main feature of safekeeping fees is that we need to calculate the volume of assets, whether they are physical or virtual assets, that every customer accumulates and on which the fees will be based.

The main figures and assumptions needed to calculate safekeeping fees revenue are:

  1. The portion % of your total active customers that will pay safekeeping fees
  2. The average value added to each customer’s asset for each transaction or per period and its increase in value per year
  3. The number of transactions per month/year and its increase per year
  4. The average value of assets sold per customer per month/year, which decreases the total asset value per customer, and possibly its change per year
  5. The type of fees based on the calculated portfolio value, for example insurance and safekeeping/inventory fee
  6. Customers split % with the portion of safekeeping customers who will buy each type of fee, when there is a choice. The sum should be at least 100%.
  7. Fee amount % based on the portfolio amount as well as any price inflation over the years

Directs costs to safekeeping revenue include:

  • Property costs, which may include rent of a warehouse or the same type of fees charged to customers with a mark-up
  • Transaction fees
  • Credit card or payment fees

Any property purchase cost would be included in investments.